Thinking of Selling Your Business?
Start Preparing Before You Need To…
One of the things I find interesting about business ownership is how much time people spend building their companies and how little time they spend thinking about what happens when they eventually want to step away.
It’s understandable.
Running an established business is demanding. There are customers to look after, people to manage, cash flow to consider and opportunities that need attention. And when things are going well, there’s often no particular reason to think about selling. But sooner or later, every owner will begin thinking about what the next stage might look like.
Some will want to retire completely, others to pursue new interests, realise some of the wealth they’ve created or simply reduce their involvement in the day-to-day operation. The difficulty is when you’ve decided you want to sell and the business simply being not saleable as it exists today.
What makes a UK business attractive to a buyer?
When someone considers acquiring an established business, they’re interested in rather more than the turnover or the profit shown in the latest accounts.
They want to understand the quality of the business they’re buying. Is it consistently profitable? Does it have a capable management team? Are its customer relationships secure? Does it occupy a strong position in its marketplace? And what happens when the existing owner leaves?
That last question is particularly important. Many successful businesses are still heavily dependent on their owners. The owner may control the major customer relationships, make most of the commercial decisions and possess knowledge that hasn’t been properly passed on to anyone else.
From the owner’s perspective, this can feel perfectly normal. From a buyer’s perspective, it introduces risk. And the more uncertainty a buyer has about the future performance of the company, the more difficult it can become to agree an attractive valuation and complete a transaction.
Start by making the business less dependent on you
If you’re thinking about selling your business within the next few years, one of the most useful things you can do is strengthen the people responsible for running it. That means developing a management team with genuine responsibility and the ability to make decisions. It also means establishing clear operating processes so the business doesn’t rely entirely on the owner’s personal knowledge.
A useful test is to consider what would happen if you were away for a month. Would the company continue to operate effectively? Would the management team handle the important decisions? Would customers receive the same level of service? If the answer is no, that’s an area worth addressing. Not simply because it could improve the prospects of a future sale, but because it makes the business more resilient and gives you greater freedom as its owner.
Buyers want to see consistent financial performance
Another important consideration is the quality and consistency of profitability. A single exceptional year can be encouraging, but buyers generally want to understand how the company has performed over a longer period. I’d much rather see a business demonstrating steadily improving margins over several years than one relying on an ambitious forecast to justify its asking price.
Reliable financial reporting is equally important.
Proper monthly management accounts, meaningful performance indicators and a rolling cash flow forecast give an owner greater control over the business. They also make it easier for a prospective buyer to understand what’s happening. Poor financial information can create uncertainty during due diligence, even where the underlying business is sound. The more clearly you can demonstrate how the business earns its profits and generates cash, the stronger your position is likely to be.
Your position in the market matters
I’d also encourage owners to take a serious look at where their company sits in its marketplace. Being established isn’t necessarily the same as being competitive. Markets change, customers develop different expectations and competitors find better ways of doing things. A business that has operated successfully for twenty years may still need to make significant changes to remain attractive over the next five. A buyer will want to understand why customers choose your company and whether those reasons are likely to remain relevant.
Strong customer relationships, credible competitive positioning and a management team that understands the direction of the market, all contribute to the quality of the business. This is an area where owners can become a little too comfortable. It’s worth challenging your assumptions regularly rather than waiting for declining performance to force the issue.
How long does it take to prepare a business for sale?
There isn’t a single answer to this one because every business starts from a different position. Some companies are already well managed, consistently profitable and relatively independent of their owners. Others may need several years to strengthen their management teams, improve financial performance or reduce their reliance on particular customers. The important point is that meaningful improvements take time.
If you want a buyer to see a record of consistent profitability, you need to build that record. If you want the company to operate without you, you need to develop the people and processes that make it possible.
Waiting until you’ve decided to sell can leave you with fewer options than you’d like.
What if you decide not to sell?
There’s another benefit to preparing your business properly. You may eventually decide you don’t want to sell it at all. If you’ve built a company with a strong management team, healthy profits and less dependence on your personal involvement, you may find that retaining ownership becomes a very attractive option. You can continue to benefit from the business financially while giving yourself more time for other things. Or you may choose to sell part of the company, bring in additional management or make a gradual transition away from day-to-day responsibilities.
The important thing is having the choice.
I’ve always believed that a business should become more than something that provides its owner with an income. It should become a valuable asset capable of creating personal wealth and greater freedom. And the work required to make a business attractive to a buyer is often the same work that makes it a better business to own.
So even if you’re not considering selling for another five years, I’d suggest starting to look at your business through a potential buyer’s eyes today. You may be surprised by what you discover. And you’ll have more time to do something useful about it.
John F. Kettley
Building the business. Creating the wealth. Creating the choice and freedom.